S&P upgrades long-term credit rating of Halyk Savings Bank of Kazakhstan; outlook Stable

/Standard & Poor's, Frankfurt, July 16, 14, heading by KASE/ – On July 16, 2014, Standard & Poor's Ratings Services revised its long-term counterparty credit rating on Halyk Savings Bank of Kazakhstan to 'BB+' from 'BB'. The outlook is stable. At the same time, we affirmed the 'B' short-term rating. We also assigned our 'kzAA-' Kazakhstan national scale rating to Halyk. The rating actions reflect our view that Halyk's competitive position has strengthened over the past four years, leading us to revise our assessment of the bank's business position to strong from adequate. Halyk emerged relatively unscathed from the severe crisis that affected the Kazakh banking sector in 2007-2008, and since then has been able to reinforce its business and financial profiles, unlike many peers. We believe the bank will continue to enjoy superior business diversification and earnings stability in the next two years. The strong business position reflects the bank's leadership, business stability, and sustainability in the Kazakh banking system over the past decade. With assets of $14 billion as of June 1, 2014 (unconsolidated), Halyk is the country's second-largest domestic franchise after Kazkommertsbank. It benefits from a stable and experienced management team, and has a more cautious lending strategy than peers' over a full economic cycle. In our view, Halyk's business position in the Kazakh banking sector is superior to that of any other bank. Halyk has demonstrated stable financial results over the cycle, due to its strong pricing power and cheap cost of funds. It did not post a loss in the 2007-2008 financial crisis and improved its return on average assets (ROAA) to 2.9% in 2013 from 0.6% in 2009. We expect that the bank will outperform its local peers again in 2014-2015 with an expected average ROAA of 2.7%. Halyk's business diversification exceeds that of local peers. It has the only universal banking model in Kazakhstan, with its core activities of retail and corporate banking complemented by brokerage, leasing, and insurance. The bank's revenues were well diversified between corporate (51% of total) and retail banking (43% of total) in 2013. The bank has by far the strongest franchise in retail deposits, with a 21% market share as of March 31, 2014, in a country of 17 million people. It benefits in this respect from its legacy as a savings bank during the Soviet era, and has the largest distribution network in Kazakhstan (541 branches and outlets). While there was a run on three midsize Kazakh banks in February 2014, Halyk saw an inflow of deposits from other banks in a flight to quality. It is also a leader in consumer loans backed by salary payments, a segment that is less risky, in our view, than unsecured consumer loans. Halyk's pending acquisition of HSBC Bank Kazakhstan would further marginally strengthen its competitive position in the Kazakh banking sector, given the healthy financial profile of HSBC and its valuable portfolio of blue-chip clients. HSBC would add about 9% of assets and 5% of loans to Halyk's balance sheet as of June 1, 2014 (unconsolidated). The ratings also reflect Halyk's higher profitability than peers' through the cycle, lower funding sensitivity, and lower concentrations in the lending book. Offsetting factors are increasing macroeconomic risks in Kazakhstan and the competitive threat from smaller banks that have experienced a quicker turnaround due to their size. The bank continues to benefit from a "high" likelihood of extraordinary government support, leading to a one-notch rating uplift above its stand-alone credit profile (SACP). The stable outlook reflects our expectation that Halyk will maintain greater business stability than peers and sustainable profitability, leveraging on its leading market position in key business segments, strong pricing power, and the low confidence sensitivity of funding. We could take a negative rating action if the bank's capitalization weakened materially, due for example to significantly higher provisioning costs or large dividends, resulting in our projected risk-adjusted capital (RAC) ratio before adjustments falling below 5%. This is not our base-case scenario, however. A reversal of the positive trend in asset quality and single-name loan concentrations, or a material increase in credit costs, would negatively affect our assessment of the bank's risk position. We do not expect to take a positive rating action on Halyk over the next 12-18 months. We expect operating risk for banks in Kazakhstan to remain high, which we believe would prevent further substantial improvement in their creditworthiness. Primary Credit Analyst: Annette Ess, CFA, Frankfurt (49) 69-33-999-157; annette.ess@standardandpoors.com Secondary Contact: Kirill Lukashuk, Moscow (495)783-4061; kirill.lukashuk@standardandpoors.com Additional Contact Financial Institutions Ratings Europe; FIG_Europe@standardandpoors.com [2014-07-17]